Brazil real tumbles close to record low despite central bank signal, rate futures rise

By Jamie McGeever

BRASILIA (Reuters) - Brazil's real slumped on Thursday to within sight of its all-time low against the dollar, despite the central bank's signal a day earlier that its latest interest rate cut could be its last, and a broad rise in market-based interest rates.

The real's decoupling from rates suggested speculative flows were behind the currency's slide, given that the rise in rates futures was widespread and on strong volume as traders unwound bets on further monetary easing from the central bank.

The bank's rate-setting committee known as Copom on Wednesday reduced the benchmark Selic rate by 25 basis points to 4.25%, as expected, but issued surprisingly clear forward guidance that the easing cycle was now over.

The U.S. dollar slid below 4.21 reais for the first time in a week but quickly roared back to 4.2798 reais, almost touching last week's record high 4.2873 reais (BRBY), as the lack of investor inflows into Brazil weighed heavily on the real.

(Graphic: Brazil Real - https://fingfx.thomsonreuters.com/gfx/mkt/13/1836/1805/BRL427.png)

"For the real, a weak growth and low carry environment alongside a widening current account deficit is bearish as it limits the attractiveness of Brazil as a destination for foreign portfolio flows," Barclays (LON:BARC) analysts wrote in a note to clients.

"We see limited room for a meaningful relief rally from the relatively more hawkish central bank tone," they said.

Cleber Alessie Machado, broker at H. Commcor in Sao Paulo, said that the absence of investment inflows from abroad, against a backdrop of relatively low interest rates and yields, makes the real vulnerable to bouts of speculative attack.

"There's no flow. And no flow gives speculators the confidence to bet against the real," he said.

While the currency fell, rates markets rose, especially futures contracts around late 2021 and early 2022, as traders priced in a higher curve.

The January 2022 interest rate future , for example, was last up around 12 basis points at 5.02%, on record trading volume of over 620,000 contracts.

(Graphic: Brazil rate futures - https://fingfx.thomsonreuters.com/gfx/mkt/13/1837/1806/BRAZILRATESFUT.png)

That was more than the previous record 604,400 contracts traded on Aug. 27 last year, when the central bank intervened in the spot currency market selling dollars for the first time in over a decade.

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Other market participants, however, were more optimistic on the real's prospects in the coming weeks and months, noting that the prospect of no more rate cuts should lend it some support.